Have you noticed that governments are stepping in more often to regulate things? There appears to be renewed interest in industrial policy. In the words of the magazine The Economist, “governments around the world are becoming bossier to the private sector.” Why is this? What will be the overall effect?
On January 20, 2022, Sacha Nauta, executive editor of the Economist, posed questions to her colleagues: Jan Piotrowski, business editor, and Don Weinland, China business and finance editor, in order to explore the rise of state interventionism and its potential consequences.
Old versus New
“There’s been an increase in the state pushing against corporatism,” Jan Piotrowski said. It is different from the “old interventionism” of the post-World War II period when many companies were nationalized in countries such as France. After that time, there was a “hands-off” period.
The state tries to influence economics through three channels: industrial policy (directly giving subsidies); regulation (for example, of labour, pollution); and taxation. He said taxation was “at an inflection point” after decades of falling corporate taxation rates.
Don Weinland gave the perspective of interventionism in China. “Industrial policy is driven by Chinese government goals,” he said. “China is unique in the top-down way it implements policy.” Local governments are the key implementers of any policy, but there are many weak points. “Local officials are in their roles for a very short period of time.”
A decade ago, the U.S. reacted very little to what China was doing. “Now, China is mentioned in every U.S. policy paper,” Weinland said. “China drives the U.S.”
Piotrowski noted that in Brussels and Washington, “China is something of a model.” With the rise of globalization, companies are learning to ask for whatever subsidies China is offering. It’s an industrial policy arms race.”
“The bosses of big companies wish that European and U.S. governments planned ahead as much as the Chinese do,” he said.
Growth
“Why is there more interventionism now?” Nauta asked. “Is there a change in what people expect?”
Since the financial crisis of 2007-08, people have realized capitalism is broken, and it does not work in the interests of ordinary people. Income inequality is increasing. There is a growing sense that government must address things like climate change and the pandemic—that these are beyond the role of corporations. “Geopolitics is lying on top of a very intricate set of corporate relations,” Piotrowski said. “Governments must think about national security.”
Weinland spoke about China and artificial intelligence (AI). “A policy has been in place since 2017,” he said. “The high-level wish list of the central government’s AI strategies is communicated to local governments. The state funds investment in ‘technologies of interest.’ Sometimes they invest to make a profit; sometimes they invest just to participate.”
“The governments in the west cannot think as long-term. They make a lot of wasteful investments,” he said. “It’s a scramble for resources.”
Over-reach?
“Has the Chinese crackdown—on things like video games and Alibaba—gone too far?” Nauta asked. “Investors are wondering if China will be able to keep innovation in the tech sector. The small companies are still surging forward.”
According to Piotrowski, the prevailing wisdom used to be “do not harm consumer welfare—that was the guiding light in developing anti-trust policy.” Now, however, regulators look at more things, such as the effect of concentration on other economic sectors, such as suppliers.
“Anti-trust policy is a Swiss army knife,” he said, referring to its usefulness and adaptability to different problems.
“In Europe, the digital markets’ legislation is coming through,” Piotrowski noted. “That will have an effect on the big American tech firms in Europe.”
Ordinary citizens are supportive of government interventionism in some ways. For example, they support the data protection element, Weinland said, “so that prices can’t be changed, depending on the browser search history.”
“There is a sense, broadly, that this system is not working for everyone,” Piotrowski said. “Most people don’t think about geopolitics, but they do care if the price of oatmeal has gone up. If prices rise, there might be a backlash.”
Climate change
“Is interventionism necessary, to address climate change?” Nauta asked.
“The rise in red tape is relentless,” Piotrowski said. “The state has an important role in making sure companies can’t introduce externalities such as CO2 emissions.” It will be up to the state to introduce the carbon tax. “It’s not a question of whether you regulate, but how you regulate.”
To avoid the heavy hand of the state, Weinland said he has not seen evidence of investors pivoting to investment in countries other than China.
“European investment in China has decreased by a trillion dollars over the past couple of years,” Piotrowski said. “It’s hard to see that coming back.”
Meanwhile, Indian Prime Minister Narendra Modi has a mantra: “self-reliant India.” It is the same as what China was doing, Piotrowski said, for the same reason: to avoid the impact of American sanctions. “The Indian high-tech boom appears to have fizzled.”
“What is the WTO doing about creating fairness in the international trade regime?” Nauta asked.
It’s a cornerstone of the Economist: “the more free trade, the better,” because countries that trade together are less likely to have military conflict. Piotrowski acknowledged that some people are hurt by totally open trade. He deplored “gaming” economic development through underhand subsidies.
Weinland said, “China thinks Trump is their biggest friend because he forced them to realize the dangers of relying on the west.” Now China might have to develop its own semiconductor industry to the necessary high level. “It’s troublesome to build it from scratch,” he said.
Stakeholder Capitalism
Nauta asked about “stakeholder capitalism,” the theory of business that accounts for multiple entities like employees, suppliers, local communities, creditors, and so forth.
“The idea is to pre-empt regulation in certain areas,” Piotrowski said, but he doubted the sincerity. “It’s a weird, fuzzy term that people haven’t thought through clearly. People say that companies have grown too powerful, yet they need to do even more to protect workers and the environment.”
“In China, stakeholder capitalism is not a big discussion,” Weinland said. “ESG is barely trickling into China right now,” he noted, referring to environmental, social and corporate governance (ESG). He believes the pandemic will accelerate state interventionism. “Large cities are getting completely locked down. QR codes have become an advanced tracking system for people.”
Piotrowski agreed that the pandemic accelerated state interventionism in Europe. “And the bureaucracy will not want to relinquish its powers. It is telling some people they must work from home.”
Nauta asked the panellists to name some positives of interventionism.
Piotrowski pointed to French president Emmanuel Macron’s “France 2030” climate change campaign. “In the short run, it will be good for consumers, but in the long term, companies become lazy and flabby when subsidized by the state.”
As for tariffs, he said, domestic firms will be easily able to raise prices without foreign competition.
Weinland opined that the tech crackdown in China made “huge winners” of small to medium enterprises in the semi-conductor supply chain. As well, “fake AI” companies are winning. He concluded, “Interventionism has winners and losers.” ♠️
Note